With the looming vote on the “Fair Tax for Illinois,” state residency planning has taken on new importance. The coverage to date regarding the proposed “Fair Tax For Illinois,” largely tainted by political bias, has been anything but clear.  

The proposal is simple enough, though – it intends to change the existing Illinois income tax structure from one flat rate (currently, 4.95%) to a series of graduated rates.   The impact, however, is neither certain nor clear.

First, the existing flat tax is mandated by the Illinois Constitution, which is why the rate system can only be changed by amending the Illinois Constitution.  Doing so is a complex and difficult process, making systemic tax changes difficult.

According to the Illinois Senate Joint Resolution Constitutional Amendment Number 1, the explanation of the proposed amendment is as follows: 

“The proposed amendment grants the State authority to impose higher income tax rates on higher income levels, which is how the federal government and a majority of other states do it. The amendment would remove the portion of the Revenue Article of the Illinois Constitution that is sometimes referred to as the ‘flat tax,’ that requires all taxes on income to be at the same rate. The amendment does not itself change tax rates. It gives the State the ability to impose higher tax rates on those with higher income levels and lower income tax rates on those with middle or lower income levels. You are asked to decide whether the proposed amendment should become a part of the Illinois Constitution.”

To be clear, the amendment would NOT SET THE TAX RATES, it would only allow the State (legislature) to impose graduated tax rates. Herein lies the uncertainty.   These rates, once set, could be changed, and thereafter changed again.  

If the Amendment passes, the General Assembly has proposed the initial new tax rates as follows (but again, these rates could easily and repeatedly be changed): 

   "(35 ILCS 5/201.1 new)

    Sec. 201.1. Tax rates. In the case of an individual, trust, or estate, for taxable years beginning on or after January 1, 2021, the amount of the tax imposed by subsection (a) of Section 201 of this Act shall be determined according to the following tax rate structure:

1. for taxpayers who do not file a joint return and have a net income of $750,000 or less:
   1. 4.75% of the portion of the taxpayer's net income that does not exceed $10,000;
   2. 4.9% of the portion of the taxpayer's net income that exceeds $10,000 but does not exceed $100,000;
   3. 4.95% of the portion of the taxpayer's net income that exceeds $100,000 but does not exceed $250,000;
   4. 7.75% of the portion of the taxpayer's net income that exceeds $250,000 but does not exceed $350,000; and
   5. 7.85% of the portion of the taxpayer's net income that exceeds $350,000 but does not exceed $750,000; and
       
2. for taxpayers who do not file a joint return and have a net income that exceeds $750,000, 7.99% of the taxpayer's net income;
    
3. for taxpayers who file a joint return and have a net income of $1,000,000 or less:
   1. 4.75% of the portion of the taxpayer's net income that does not exceed $10,000;
   2. 4.9% of the portion of the taxpayer's net income that exceeds $10,000 but does not exceed $100,000;
   3. 4.95% of the portion of the taxpayer's net income that exceeds $100,000 but does not exceed $250,000;
   4. 7.75% of the portion of the taxpayer's net income that exceeds $250,000 but does not exceed $500,000; and
   5. 7.85% of the portion of the taxpayer's net income that exceeds $500,000 but does not exceed $1,000,000; and
       
4. for taxpayers who file a joint return and have a net income of more than $1,000,000, 7.99% of the taxpayer's net income."

Regardless of one’s political leanings, the simple fact is that with a “flat tax” system, the legislature was cautious when attempting to alter the tax rate as the proposed rate would apply to all taxpayers.  Should the system become one of a graduated nature, the reality is the legislature will have much more flexibility in setting rates targeted to certain levels of income.  

Could the new Illinois proposed rates be set even higher than currently proposed?  Looking at other states, the answer is yes.  For instance, for individuals, California’s top income tax rate is 13%, while New York’s top income tax rate is 8.82%.  Any rise in state income tax must also be viewed through the lens of the recently capped state and local tax deduction of $10,000, which reduced the number of taxpayers able to fully deduct SALT on their federal returns.  The SALT deduction was often viewed as lightening the tax burden on those who paid higher state taxes; but it no longer exists.  

While the passage of the amendment is uncertain, taxpayers should review their personal situations and contemplate possible actions should the current proposal pass, as well as the possibility that the proposed rates may be raised.  

State residency planning has always been important, but with the prospects of the pending amendment, has taken on a new sense of urgency.  As always, DUGGAN BERTSCH would be pleased to discuss your any questions you might have regarding residency planning or how the possible tax system change may impact you.